Is MyHotelMatch (EPA:MHM) Using Debt In A Risky Way?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, MyHotelMatch S.A. (EPA:MHM) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for MyHotelMatch

What Is MyHotelMatch's Debt?

The image below, which you can click on for greater detail, shows that at June 2023 MyHotelMatch had debt of €4.37m, up from €1.08m in one year. However, it also had €601.0k in cash, and so its net debt is €3.77m.

A Look At MyHotelMatch's Liabilities

According to the last reported balance sheet, MyHotelMatch had liabilities of €4.10m due within 12 months, and liabilities of €3.38m due beyond 12 months. Offsetting this, it had €601.0k in cash and €2.50m in receivables that were due within 12 months. So it has liabilities totalling €4.39m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of €5.31m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But it is MyHotelMatch's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Given it has no significant operating revenue at the moment, shareholders will be hoping MyHotelMatch can make progress and gain better traction for the business, before it runs low on cash.

Caveat Emptor

Importantly, MyHotelMatch had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable €742k at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through €255k of cash over the last year. So suffice it to say we do consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for MyHotelMatch that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.